Speedy Delivery Systems can buy a piece of equipment that is anticipated to prov

Question

Speedy Delivery Systems can buy a piece of equipment that is anticipated to provide a return of 11 percent and can be financed at 8 percent with debt. Later in the year, the firm turns down an opportunity to buy a new machine that would yield a return of 15 percent but would cost 17 percent to finance through common equity. Assume debt and common equity each represent 50 percent of the firm’s capital structure. a. Compute the weighted average cost of capital. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Explanation / Answer

weighted average cost of capital = Cost of Debt(Kd) * weight of Debt + Cost of Equity(Ke) * Weight of Equity

So Cost of Debt (Kd) = 8%

Cost of Equity (Ke) = 17%

So WACC = 8% * 0.50 + 17% * 0.50 =12.50%

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